Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi!
Reading time: About 5 minutes
Quote
"Darwin's lesson is that even people who aren't geniuses can outthink the rest of mankind if they develop certain thinking habits."
Peter Bevelin
Mental Model
Hindsight Bias
Here’s something interesting that happened. I was seeing my favourite team Manchester United play. When I was watching them play, I thought and told myself ‘My God, we are truly shit’. I thought that our defence is useless and in general are just shit.
But to my surprise, they won the game. Then I went and told my friends, ‘told you we are not bad, all these critics don’t know what we are truly capable of Manchester United are well and truly back. Our defence is solid probably the best in the world and our team was just suffering a bad patch.’
Some call this delusion. But that is what I believe is special about supporting your team. You hype them up even if you know they are shit.
But coming back to the point.
Notice, how before we won I said that we were bad and our defence was useless, and after the match I said that we were back and we had a solid defence.
This is hindsight bias.
“Hindsight bias occurs when we look backward in time and see events are more predictable than they were at the time a decision was made. This bias, also known as the “knew-it-all-along effect,” typically involves those annoying “I told you so” people who never really told you anything.” ~ Farnam Street
This is so common, yet unnoticed.
I can think of a dozen situations where we go back in time and think that that we ‘knew it all along’. This is dangerous mainly due to the fact that it fuels our ego and makes us think that we are smarter than what we actually are.
“People are susceptible to hindsight bias because it’s comforting to think that the world is predictable and thus somewhat orderly. As a result, we seek to see unpredictable events as predictable. We desire a positive view of ourselves and therefore try to make sense of it by creating a story or narrative that shows we knew the outcome.” ~ Investopedia
“Hindsight bias helps us become less accountable for our decisions, less critical of ourselves, and over-confident in our ability to make decisions.” ~ Farnam Street
I find this bias dangerous because it fuels our ego. In my opinion that is the worst thing that can happen to a person. For a person to think that he/she is smarter than they actually are. It leads to a lot of problems going ahead and ruins your potential.
As Munger said,
"If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120."
In Investing
How many times has it happened that people see a stock say that this is not that good but it’s fine, and if something bad happens they come and tell you ‘I told you so’.
This is very funny because around a year back one of my friends asked me about a company known as Polycab and I said that it is not a bad company, but it is expensive. Now since then the company did extremely well.
Until now.
The company had an Income tax raid, and apparently they made up 1000cr of Sales. So I naturally went and told my friend ‘told you so’. I did not know a single thing about the company, I still don’t. But since I saw that me telling him not to buy turned out to be right just by ‘pure luck’ I went and told him ‘I told you so’ like I knew what was going on.
Truth is, I have absolutely no clue what the hell is going on. My friend probably thinks I was smart to say what I said. I myself thought that I am smart. But while writing about this mental model, I realised I fell prey to this bias.
This is what the reality is,
I said it was expensive. There was no way that I knew it was a bad company. I may have even made the judgement too soon. One thing is clear. I don’t know enough to comment.
As an investor it is very important to not suffer from hindsight bias. This makes it very hard to evaluate our past decisions. We think we are always right.
Antidote
Raunak Onkar on how to combat hindsight bias,
“One bias I have combatted successfully is the hindsight bias.
You may have never thought about an event occurring, but it occurs. And you suddenly, somehow connect it in your own thoughts and believe that it is something you thought about a long time back, and it has now actually happened. But there is no evidence in reality whether you have actually thought about it or acted on it.
The only evidence you have is what is in your portfolio at any given point, and how you acted in the past when the information was there. And the evidence if you wrote it down your thoughts along with the date.
I started doing this. I write notes about my investment decisions and investment ideas. So I know, at particular points in time my thoughts about a company or sector.
So in the future, I have a reference point as to what I actually thought about. The risk assessed. And how it played out.
If you write things down with dates, it's very hard to lie to yourself. It need not be an essay, just a few lines too. It really helps to eliminate this hindsight bias quite effectively. It changes your perspective. Looking at how you thought. Sometimes, I go back 5 years and I realize I was such an idiot to think in such naive terms. Or, the way some things have played out, I was not entirely naive. So you also gain confidence from your own thought process. And you see your own progress.”
Interesting find
That’s it! Enjoy your weekend!
If you liked the post please share it with your family and friends.
Thank you,
Samvit.